Of Facebook and Faust

What’s up with Facebook?

The most overhyped IPO in history is making history, in a negative way. The shares have declined by over 50% from their first day of trading, but they are still priced in nosebleed territory: 34 times projected earnings, versus 12 times for Apple and 13 times for Google. Among the challenges facing the newly-public company are: converting a successful desktop platform into a compelling smartphone app; retaining key employees; and above all turning a billion or so active users into a reliable source of recurring revenue.

When Facebook was a private company, management could face its challenges quietly, deliberately, patiently. But as a public entity, the rules have changed. Stock analysts, the media, and ordinary shareholders want a steady supply of new news—new products, new markets, new corporate strategies. We want a sense that the company is doing something to address its issues.

When a company goes public, it gains daily minute-by-minute liquidity for its shares in exchange for an insatiable appetite for information. The stock market lowers the cost of capital, for if our stock purchases were locked up for decades, we would demand a higher return on investment. But in exchange, we need to know what’s going on now. That’s the Faustian bargain that public companies make.

And if investors don’t have the confidence that management is effectively dealing with its problems, they will vote with their feet and sell their shares. Almost 2 billion shares of Facebook could hit the market before year-end as currently locked-up holdings become free to trade. Managing a public company is tough. We’ll see if the 28 year-old Zuckerberg is up to it.

Douglas R. Tengdin, CFA Chief Investment OfficerHit reply if you have any questions—I read them all!

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Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. -
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